The amount of life insurance you need is not an exact science. There are many factors that go into calculating how much life insurance someone needs, including family size and income. However, there’s a simple rule-of-thumb that can help people get a ballpark estimate of what they should purchase.
how much life insurance do I need, rule of thumb
If you had to put the amount in simple terms, the rule of thumb is 10xs your current annual salary. However, there is a more specific way to solve this problem.
A married couple with children will have varying financial demands based on the changes in their family. To figure out how much life insurance coverage they’ll require if an income source dies, it’s important to consider three distinct income periods:
- Family dependency period: The first period is known as the family dependency era because the surviving spouse will have children to support. The family’s income demands will be greatest during this time.
- Preretirement period: When the surviving spouse’s children become independent, he or she enters the pre-retirement stage. Because the surviving spouse qualifies for Social Security survivor benefits only after he or she has dependent children in his or her care or after age 60, this time period is also known as the blackout period. Normally, the surviving spouse’s needs for money decrease significantly during this time.
- Retirement period: The final stage is known as the retirement period. The surviving spouse’s working income stops and his Social Security and outside retirement payments begin during this time.